Other familiar asset management brands have entered the fray as well with their own products: the Ark 21Shares Bitcoin ETF (ARKB), the VanEck Bitcoin Trust (HODL), the WisdomTree Bitcoin Fund (BTCW), the Invesco Galaxy Bitcoin ETF (BTCO), the Valkyrie Bitcoin Fund (BRRR), the Hashdex Bitcoin Futures ETF (DEFI) and the Franklin Bitcoin ETF (EZBC). But not every fund will survive in the long term, Schwenk says.
“We don’t need 11 of these. We’ve already seen a fight over fees, and we’ve already seen a fight over brand and reputation. I can’t see a long-term future where all 11 of these will have material AUM, so I suspect that we’ll see some consolidation.”
The Bad
Even if the long-awaited emergence of spot bitcoin ETFs is good news for many asset managers and investors, there are a few caveats when you’re thinking of investing in cryptocurrencies through an exchange-traded fund. For one thing, ETF investors miss out on several advantages of owning tokens directly, such as the ability to stake (pledge assets for rewards) and other income-generating strategies, as well as participation in an ongoing technology project. ETF investors can’t take tokens offline and keep them in a secure cold storage; the funds will always be held by the asset manager.
Like any other ETF trading in a single stock or commodity, bitcoin ETFs by themselves aren’t likely to be a major part of anybody’s personal wealth management portfolio. Instead, they’ll probably be used as more of a trading tool for highly active investors. Bigger investors, such as institutions, will likely look at these funds for signals of digital coins’ price performance.
Another disadvantage, of course, is that ETFs come with fees. Owning bitcoin tokens directly can be fee-less. So it may be difficult for fiduciary advisors to justify holding their client’s bitcoin allocation in products laden with charges the client wouldn’t otherwise be paying if the cryptocurrency had been bought directly.
These new bitcoin ETFs “are probably going to have broader success with the retail market, but the fact that they’re in a better wrapper and listed on exchanges—and coming from reputable, established firms—will give some institutional clients more comfort with them,” says Schwenk. “We do run into institutional clients who have used cryptocurrency futures as their primary way to express an opinion because of the discount to net asset value on many digital currency products.”
Because they trade in real time, ETFs should be able to more successfully track a cryptocurrency’s net asset value than private crypto funds have; the ETFs’ prices will also move independently of the coins’ net asset value and may at times even trade at premiums or discounts.
There’s also a question about whether digital asset investors should concentrate their holdings in bitcoin alone. Unlike many other prominent tokens, such as ethereum, solana and cardano, bitcoin’s blockchain isn’t used as the infrastructure for technological development. Its value comes purely from the scarcity embedded into its programming, and the speculative appetite of crypto investors.
“You’re locked into bitcoin as your only choice if you want to invest via an ETF right now, and that might be OK for a lot of people who think about bitcoin alone as diversification in their portfolio,” Schwenk says. However, you’re not diversified within the crypto space itself, which could spell trouble if any problem with bitcoin itself arises. “It could be the technology, could be an ongoing reputational problem, it could be an investment thesis problem where people struggle to see where bitcoin cash flows come from and what justifies its price.”
More, Better Products To Come?
The landscape is going to keep changing. Before the spot bitcoin ETF arrived, investors had to work with crypto futures funds. And the new products will have to make room for even newer ones. Spot ethereum ETFs are on the horizon in the near future, and those products will likely be followed by funds tracking cryptocurrency indexes with many different tokens, active cryptocurrency ETFs, and multi-asset ETFs containing allocations to cryptocurrency.
Within the next decade, advisors will likely be able to access a tokenized version of the S&P 500 that represents the stock index but trades openly, without an exchange or any intermediary, in real time, like a cryptocurrency. The idea is to create even more resource-efficient, tax-efficient and liquid trading vehicles. Which means the story of cryptocurrency ETFs likely doesn’t stop with spot bitcoin. With better products promised to be at their fingertips in the future, some advisors might still think of waiting to get in.
“Almost every large asset manager or ETF sponsor we talk to across the board has a cryptocurrency strategy,” says Schwenk. “They’re all looking for moments that they want to get into the market, and for most, this isn’t it. They think it will be a race to the bottom on fees, and these products aren’t really interesting to innovate with today. Most of these companies are looking for different ways to bring crypto ETFs to market and they’re waiting for the right timing to do so.”
The real question, says Schwenk, is whether the SEC will now be more open to innovation in the cryptocurrency product space, or whether these spot bitcoin ETFs are a onetime relaxation of the agency’s opposition as it gears up to fight newer products in the future.
Schwenk says: “I predict they are cautiously receptive to an ethereum ETF because of where ethereum is at right now in terms of whether or not it could be a security, how liquid the markets are and the level of institutional support from companies like Coinbase. I suspect, however, that as long as [Gary] Gensler is the SEC chair, we’ll see continued resistance to making progress on these products.”